Market review:
2022 was a volatile year with global risk aversion heightened by a number of factors - including rising global inflation, interest rates and the risk of a global recession. However, uncertainty creates opportunity for the discerning investor and we have been through many of these cycles in the past. In 2022, the MSCI World Index fell by 18.1% in US dollar terms while the MSCI EM Index fell by 20.1%.

Other factors that contributed to the volatility were:
-The invasion of Ukraine by Russia in February. Following this, the US and Europe coordinated broad based sanctions against Russia and specific individuals.
-The US Fed raised interest rates and dropped the term ’transitory’ when discussing inflation. Markets remained volatile as participants tried to determine the prospects for the US economy, labour markets, inflation and the consequent interest rate trajectory.
-The UK experienced major upheaval, with three different prime ministers serving in a matter of weeks.
-Xi Jinping secured an unprecedented third time as the top leader of the Chinese
Communist Party. Despite zero-Covid being a cornerstone of Xi Jinping’s policies, towards
the end of the year the policy was relaxed (the potential normalisation of economic activity
was welcome by markets).
-Europe agreed to impose taxes on imports based on the amount of green house gases emitted in the production of the goods. This is the first time that climate change regulation has been inserted into global trade rules. The bloc also proposed a cap to natural gas prices to shield consumers from the effects of higher energy costs.

The energy sector was by far the best performing sector for the year (gaining 46%). It was also the only sector that posted growth. Utilities (-4.6%), health care (-5.6%) and consumer staples (-6.1%) held up relatively well. Communication services (-37%), consumer discretionary (-33.3%) and technology (-30.7%) were the worst performing sectors.

Portfolio review
The fund outperformed it’s MSCI World benchmark in the last quarter of the year, with the A class delivering a return of 13.1% vs. the benchmark’s 9.8% (in US dollars). The main detractors from performance for the quarter were Disney, Roche and Medtronic. Disney’s stock price was down ~8% for the quarter, which translated to a detraction of 40bps from relative performance. The quarter has been eventful at the Walt Disney company as the board removed the CEO, Bob Chapek, and replaced him with his predecessor, Bob Iger. Weeks after Bob Chapek’s appointment in February 2020, the Covid-19 pandemic hit – which saw Disney close its theme parks and cruise lines and an impact on the production of movies and TV shows. As a result, fundamental performance was not consistent during Bob Chapek’s tenure. Weeks before he was removed, Disney reported large losses in its streaming business (~$1.5bn) and the market punished the stock as a result. Bob Iger has now committed to focusing on cost cutting and profitability at the streaming business and on giving decision making back to the creative teams. In November the share price of Roche – the pharma giant - came under pressure when they had a setback in the development of a promising Alzheimer’s drug. Although Alzheimer’s is difficult to treat (the probability of success was low), the drug could have been a huge success which would have likely led to durable top-line growth for the next decade. Although R&D challenges are part of the package for pharma businesses, Roche has an enviable dominance in most of its focus therapeutic areas, a strong balance sheet (which gives them flexibility to acquire attractive assets) and a promising pipeline (which we believe will help offset the ongoing biosimilar erosion). Roche is trading on a 17x PE and is defensive in nature, which should enable steady returns in an uncertain environment – this was indeed the case for 2022. Medtronic declined by 3% in the quarter, mainly due to the company’s investor update that showed trial results from a new renal denervation treatment (Symplicity Spyral) which were below the expectations of analysts who have been watching the industry’s efforts in the space for years. Although this development is disappointing, the company remains one of the global leaders in medical devices (particularly in cardiac devices) and we believe the stock remains significantly undervalued. Medtronic currently trades on a 15x PE and 3.3% dividend yield. The main contributors to performance for the quarter were Arch Capital Group, Oracle and HCA Healthcare.

Arch Capital, a specialty non-life reinsurance and mortgage insurance provider and one of the fund’s core holdings, was the second largest contributor to performance for the quarter adding 0.77% to relative performance. The strong performance of the stock over the quarter reflects what was a well-received Q3 2022 earnings report. The business showed strong premium growth of +20% YoY which was well ahead of expectations, catastrophe losses from Hurricane Ian which were very well absorbed, as well as strong growth in net investment income on the back of higher interest rates. The stock continued to perform well into the January 2023 reinsurance renewal season which has again confirmed our thesis of sharply higher reinsurance rates which will continue to benefit margins. We remain optimistic on the outlook for the business and its associated shareholder value creation and continue to hold it as one of the fund’s core holdings.

Oracle (up 35% during the quarter) hosted an analyst day during October and positively surprised the market with its aggressive growth goals for 2026. At the same time they expect operating margins, which are already very healthy, to expand further to 47% by 2026. We believe Oracle remains undervalued and very well positioned to navigate through an inflationary environment due to its strong pricing power, sticky client base and high operating margins.

HCA’s stock price increased by ~31% during the quarter and contributed 0.52% to relative performance. The stock underperformed in the preceding months as fears around labour inflation started to mount. However, profits for HCA topped expectations in the third quarter and the uncertainties appear to have reduced. HCA has continued to execute better than peers and looks well positioned for the year ahead.